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Understanding the Risk Appetite and Priorities of your Business PowerPoint Presentation

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  • Slide 1 - Understanding the Risk Appetite and Priorities of your Business/ Organisation www.pwc.com
  • Slide 2 - Agenda Overview The ‘what’ and ‘why’ Developing it for your business – how hungry are you? Performance monitoring and reporting Do you need a separate risk committee? Global observations PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity 2 14 July 2011
  • Slide 3 - 1. Risk Appetite - Overview The financial crisis , the move to market based accounting and regulatory pressures all highlight the need for greater transparency about an organisation’s risks. External stakeholders are increasingly demanding evidence of clear boundaries and guideposts that inform the nature and amount of risk an organization undertakes. A clear risk appetite strategy meets these demands by expressing the total risk that an organization is willing to take to achieve its strategic objectives and meet its obligations to stakeholders. It provides assurance to stakeholders that there are clear established boundaries for overall risk taking. 3 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 4 - 1. Risk Appetite - Overview (continued) When properly understood, clearly defined AND appropriately communicated, risk appetite becomes a tool not only for managing risk but also for enhancing overall business performance 4 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 5 - 2. Risk Appetite - the ‘what’ and ‘why’ Let us take a step back: What is Risk Appetite? 5 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 6 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) There are many different definitions of risks appetite. The amount of risk that an organisation is : Prepared to accept, tolerate or be exposed to any point in time Willing to take on in pursuit of value Prepared to accept in the pursuit of its objectives 6 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 7 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) Therefore: Risks appetite is about taking well thought through risks where the long term rewards are expected to be greater than any short term costs. It may even be appropriate in some instances to incur a loss if this paves the way to success in the long term. 7 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 8 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) The amount of risk that a company accepts will vary from entity to entity and will depend on factors e.g. external environment, people, business systems, etc Risks appetite can also vary across business units e.g. a bank’s appetite for risk in lending to established businesses may differ from its appetite for risk in lending to emerging businesses. PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity 8 14 July 2011 Risks appetite goes to the heart of how a company does business Risks appetite is in the eye of the beholder! Different stakeholders will have difference perspectives – balancing of views required
  • Slide 9 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) What should it look like? 9 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 10 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity 10 14 July 2011 Reflect the company’s strategy, including objectives, business plans and stakeholders’ expectations Reflect all key aspects of the business Acknowledge a willingness and a capacity to take on risk Detail the skills, resources and technology required to mange and monitor risk exposures in the context of the risk appetite Include a tolerance for loss or negative events that can be reasonably quantified Be periodically reviewed and reconsidered with reference to evolving industry and market conditions Be approved by the BOD
  • Slide 11 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) Why should an organisation’s Risk Appetite be defined? 11 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 12 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) Running a business with insufficient guidance in the risk levels considered legitimate to accept, or not seizing important opportunities on the perception that taking on additional risk is discouraged may result in business performance not being maximised. An organisation which is conservative and constantly erring on the side of caution (i.e. has a risk aversion culture) may result in: Creativity being stifled Innovation not encouraged Limited opportunities sought and exploited 12 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 13 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) Clearly articulating your risks appetite will have the following benefits: PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity 13 14 July 2011 Support and provide evidence of the decision making process Demonstrate how each element of the business contributes to the overall risk profile Show how different resource allocation strategies can add or lessen the burden of risk Support the approval process Identify specific areas where risks should be removed Provide transparency and consistency of business decisions
  • Slide 14 - 2. Risk Appetite - the ‘what’ and ‘why’ (continued) Therefore: There is clarity over the risks that the organisation wishes to assume There is a basis for consistent communication to different stakeholders There is explicit articulation of the attitudes of risk of the senior management 14 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 15 - 3. Risk Appetite - Developing it for your business - how hungry are you? How hungry are you? Hunger for returns without a defined appetite for risk can lead to disaster. Many apparent risk management failures have been caused by profits being chased and risks being assumed that were poorly understood. Management may make the mistake of focusing on one group of stakeholders without giving sufficient weight to the appetites of the others. 15 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 16 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Defining risks appetite is not about writing a one-off stand alone statement which is expected to drive the future of decision making in the business Its effectiveness relies on how it relates to established organisational components (e.g. strategy, business plans) and how well it is understood throughout the organisation. 16 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity A multi dimensional and balanced view should be adopted and periodically refreshed Risk appetite is not a magic number and is not always quantifiable
  • Slide 17 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? The following is a summary of the approach towards developing an effective risk appetite statement. By following a structured approach, an organisation can better understand and link its: strategic goals culture market place regulatory requirements financial sensitivity to risk 17 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Risk appetite sets a clear strategic direction and tolerance around controls
  • Slide 18 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity 18 14 July 2011
  • Slide 19 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Defining the objectives of your organisation involves considering the expectations of each stakeholder group (i.e. shareholders, BOD, management, employees, regulators, etc). Objectives can include short term expectations of stakeholders e.g. profitability or longer term expectations e.g. debt ratings and growth. As objectives change, your company’s risk appetite must be revisited to confirm it would continue to achieve its objectives. 19 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Stage 1 : Identify the organisation’s goals and objectives
  • Slide 20 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? An organisation’s goals may relate to: Market share Reputation Earning stability/growth Regulatory standing Capital adequacy External credit ratings An extension of an organisation’s objectives is its business plan which should outline how the business intends to meet stated objectives and stakeholders’ expectations. 20 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity It is important to write it down – otherwise you will not know if everyone has the same view
  • Slide 21 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? This top down approach makes the requirements of the various stakeholders explicit and stimulates debate in the executive team. This can also be used to engage your executive and non executive directors on the subject. The result is a robust framework that can be used to articulate the appetite by the internal stakeholders group through to the external stakeholders. 21 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity A top-down approach ensures that senior management is on the same page on risk management
  • Slide 22 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Stage 2 essentially means determining how much risk is currently being taken in the context of the organisation’s capacity to take risk. What is your company’s risk capacity: “ The total amount of risk your company can assume”. 22 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Stage 2 : Align risk profile to business and capital management plans
  • Slide 23 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Should the risk capacity be considered before the risk appetite? Yes……but why? The risk appetite must be set at a level WITHIN the capacity limit. Stakeholders’ views will differ on the desired safety margin and there is therefore crucial to understand this in understanding and setting the appetite. 23 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 24 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? To align the risk profile of the business plan, your organisation should complete the following steps: Identify the potential risks your organisation is exposed to Why? To determine what would prevent your organisation from achieving its objectives 24 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 25 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? To align the risk profile of the business plan, your organisation should complete the following steps: Measure the aggregate risk profile and the level of unexpected losses Why? To establish what your organisation is willing to accept in the event that a risk occurs 25 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 26 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? To align the risk profile of the business plan, your organisation should complete the following steps: C. Understand your current risk taking capacity Why? By examining the business plans, management can ascertain the degree to which it allows a buffer for future risk 26 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 27 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? To align the risk profile of the business plan, your organisation should complete the following steps: D. Consider the difference between your risk capacity and your risk profile Why? Your risk appetite will determine the size of the buffer required. Your organisation has to strike a balance between its competing strategic objectives (e.g. the availability of capital vs. the cost of capital). If the objectives are clearly articulated, they should provide a strong guideline for the level of anticipated risk appetite. 27 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 28 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? To align the risk profile of the business plan, an organisation should complete the following steps: E. Identify the zero tolerance risk exposures Why? There are some risk exposures (e.g. fraudulent or unethical) that can lead to significant and irreversible reputational damage. 28 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 29 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Practical issue: We used the word “MEASURE”…….. Real Life = it is difficult to measure/ quantify risks. If some elements of risk appetite cannot be measured, they are more difficult to manage. E.g. it is difficult to measure reputational risk although this is one risk that can benefit most from being expressed more clearly even if it is in qualitative terms. Quantitative + Qualitative measures must be used! 29 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 30 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? The implication for management is clear: Identify the risks that the organisation faces Measure them Articulate them This needs to be done in a comprehensive and balanced way where quantitative and qualitative measures are combined as well as those with zero tolerances. 30 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 31 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity 31 14 July 2011
  • Slide 32 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Having determined what is required to withstand shocks to your organisation and the current level of risk exposure, the next step is to identify the tolerance levels for specific risks. This is to ensure that the appetite remains within the boundaries of the business plan. Risk thresholds or risk tolerances are typical measures of risk used to monitor exposure compared with stated risk appetite. 32 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Stage 3 : Determine risk thresholds
  • Slide 33 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Risk thresholds enable the high level risk appetite to be broken down and communicated into measures that are actionable at the business unit level. Developing thresholds helps to ensure that appropriate reporting and monitoring processes can be put in place for effective management of these risks. Therefore thresholds should be: clearly articulated measurable 33 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 34 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Finally, your organisation will need to formalise the results of the above process through the documentation of the risk appetite in a formal risk appetite statement. This statement should then be approved by the BOD prior to communicating the document to the wider organisation. 34 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Stage 4 : Formalise and ratify a risk appetite statement
  • Slide 35 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? Now we have a risk appetite statement…… What next? Simply having a statement of the desired risk appetite will NOT by itself help the organisation take on the right risks in a well managed manner. It must be embedded throughout the organisation. 35 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Risk appetite considerations must be embedded throughout the organisation
  • Slide 36 - 3. Risk Appetite - Developing it for your business - how hungry are you (continued)? How is this done? 36 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 37 - 4. Risk Appetite - Linking it to performance monitoring and reporting It is important that performance is assessed in terms of compliance with the organisation’s risk appetite. Strong financial performance often masks the risks that are actually being taken to achieve that performance. You are allowed to make risk / reward trade-offs…..but you need to understand exactly what they are. 37 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Risk monitoring and reporting should be linked to risk appetite – as both contribute to the quality of business performance
  • Slide 38 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) What makes a risk appetite statement effective? EMBEDDING To embed risk appetite effectively in the business, management has to establish limits for each risk type and cascade them to lower levels in the organisation. This has important consequences for management information and performance monitoring requirements. Some changes/ enhancements may have to be considered, which include: 38 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 39 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) Changes to information: existing information may no longer be required; or new information e.g. to monitor risk concentrations should now be sourced. Harmonisation of existing limit structures and clarification of roles and responsibilities The organisation model should be reviewed to ensure clear responsibilities and escalation criteria for ‘hard’ and ‘soft’ breaches Trigger levels, limit structures and delegated authorities must be realigned and potential risk appetite implications considered in ALL resource allocation decisions. 39 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 40 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) What is the key message here? The design of the risk appetite framework should build on and unify existing risk and business management processes and reports. 40 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity You don’t have to start from scratch
  • Slide 41 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) What makes a risk appetite statement effective? MONITORING AND REPORTING Monitoring and reporting is fundamental to the overall process. Why? Risk appetite loses its value if departures from it are not promptly identified and followed up on. 41 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 42 - 4.Risk Appetite - Linking it to performance monitoring and reporting (continued) What makes a risk appetite statement effective? TONE AT THE TOP/ CULTURE The Board of Directors The BOD needs to fully understand that provide direction for risk appetite. They are the ultimate stewards of the organisation whose decision making responsibility extends to developing and signing off on the risk appetite. 42 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity In order to successfully embed risk appetite, the tone set by the Board and senior management is a deciding factor.
  • Slide 43 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) Then: Management Management’s role is different as they are accountable for developing strategies and business plans that are consistent with the BOD’s mandate regarding risk taking. 43 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity The tone at the top
  • Slide 44 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) The critical role of the risk appetite is the tone it sets for the risk culture across the organisation. Most major contemporary examples of company fraud and financial failure over the past 20 years were related to instances to flawed or ambiguous risk cultures. 44 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity The importance of risk culture can never be underestimated.
  • Slide 45 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) To reinforce the risk culture, the organisation’s risk appetite should be integrated into the performance framework all the way through the organisation to the individual level to ensure consistent application. The risk appetite can be expressed by performance based targets which can be measured against actual results. This can be set and managed: by (sub)business unit; products and services; and /or at a transactional level - Accountability! 45 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity All staff members have an improved understanding of what risk management means and what their role is in applying effective risk management practices
  • Slide 46 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) To recap: We start with the organisation’s strategic goals 46 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Organisational strategic objectives
  • Slide 47 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) To recap: Then using the 4-step approach, this is developed into the organisation’s risk appetite statement 47 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Board approved risk appetite statement
  • Slide 48 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) To recap: We now embed this statement into the organisation developing actionable measures at a business unit level using an appropriate tone at the top and risk culture: 48 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Business performance management
  • Slide 49 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) To recap: Which should be integrated with the performance framework and made consistent with individual performance targets : 49 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity Individual performance management
  • Slide 50 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) 50 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 51 - 4. Risk Appetite - Linking it to performance monitoring and reporting (continued) 3 questions to ask yourself: Has my senior management team recently debated its view of the organisation’s risk appetite? Can I articulate my organisation's desired overall risk appetite and can I confirm that this agrees with my key stakeholders’ expectations and perceptions of risks? Do I know where my key risk concentrations are today and where they will be in 3 years’ time? Can I articulate why these are critical to our strategy? 51 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 52 - 5. Do you need a separate risk committee? The 2008-2009 financial meltdown has renewed interest in defining risk management and making it more transparent to both regulators and investors. Regulations in some jurisdictions have enhanced its corporate governance policies requiring corporate boards to establish separate risk management committees using independent directors. The pros and cons of having a separate risk committee are explored: 52 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 53 - 5. Do you need a separate risk committee (continued) Pros Setting up a new committee gives the entire organization a chance to focus on risk, create clear lines of communication, and make risk management an explicit governance activity. Having a separate committee enhances the interactions between the company and risk professionals. 53 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 54 - 5. Do you need a separate risk committee (continued) Cons: Directors usually serve on multiple committees and may not welcome another assignment. The risk committee's responsibilities might overlap with the audit committee, which already has to address some areas of risk. Duplication of efforts can waste resources, yet each committee needs to be aware of the overall risk conditions. 54 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 55 - 5. Do you need a separate risk committee (continued) What can be done to avoid the cons: To clarify and reduce overlaps and duplicated efforts, the risk and audit committees' charters should align and coordinate responsibilities. Specific sectors can be assigned to each committee. For example, the audit committee could continue with its financial risk assessments and communicate them to the risk committee, which thus does not have to duplicate the work. 55 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 56 - 5. Do you need a separate risk committee (continued) What can be done to avoid the cons: The audit and risk committees could meet jointly on occasion. Some companies structure the committees with a chair and a deputy-chair, having the chair of one be the deputy-chair of the other, thus ensuring clear communications between the two. The scheduling of meetings and specific risk activities also needs to be coordinated so that tasks occur in a reasonable order. Internal auditors report to the audit committee, but their work must also be available to the risk committee. 56 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 57 - 5. Do you need a separate risk committee (continued) What can be done to avoid the cons: If the company has a chief risk officer, that person should also report to the risk committee. Another possibility is to have the audit committee simply become the audit and risk committee. 57 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 58 - 5. Do you need a separate risk committee (continued) Do you need a separate risk committee? To benefit from having a separate risk committee, companies need organizational clarity that minimizes duplication of effort and maximizes information flow 58 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 59 - 6. Global observations In its June 2009 Policy Paper, ACCA argued that some of the recent failures were due to the: Failure to manage the interconnection between risks inherent in entities’ business activities and management and their remuneration incentives Remuneration characterized by short term goals (not supporting prudent risk management and owners’ long term interests) Risk management departments not having sufficient influence/ power Weaknesses in reporting on risk and financial transactions 59 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 60 - 6. Global observations MarketWatch Report in January 2011 on FCIC’s comments on Citigroup: The FCIC report repeatedly raised concerns about how there was a major failure of risk management at major institutions, noting that one part of a large financial institution didn’t know what the other part was doing. 60 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 61 - 6. Global observations The Financial Crisis Inquiry Commission Report issued in 2011: The financial crisis was a failure of risk management Failures of corporate governance and risk management at many systemically important financial institutions are among key causes of the crisis A hunger for larger market share, profits and bonuses lead important financial institutions to ignore risk exposure involved in high-risk activities 61 14 July 2011 PricewaterhouseCoopers (PwC) refers to the Trinidad and Tobago firm of the PricewaterhouseCoopers global network or as the context requires the PwC global network or other members of the network, each of which is a separate legal entity
  • Slide 62 - Sustainable profitability requires taking risks and managing them adequately This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2010 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Limited (Trinidad) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Every profitable company takes risks. Improperly managed risks cause business failures. Do you have appropriate structure, people, policies and procedures to strike the right balance?
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